Nippon Chemi-Con positions risk management as the highest priority matter involving corporate leadership. Nippon Chemi-Con has established a Risk Management Committee in accordance with our Basic Policy for Risk Management. This committee is responsible for the centralized management of Group risks. We categorize existing and potential risks as strategic risks, financial risks, hazard risks, operational risks, and climate change related risks. Twice a year, these risks are evaluated by the Risk Management Committee, results of which are reported to the Executive Committee Meetings and the Board of Directors.
Among identified and reported risks, the following are major risks with the potential to impact the financial position, operating results, and cash flow of consolidated companies. Furthermore, forward-looking statements are judgments made by the Nippon Chemi-Con Group at the end of fiscal year 2022 (March 31, 2023).
1. Risks concerning economic conditions
Nippon Chemi-Con Group's principle business is manufacturing and sales of capacitors and other electronic components. Our business has expanded globally, covering regions including Japan, Americas, Europe and Asia, and therefore, changes in the economic conditions of these regions and countries, where our products are sold, have the potential to impact the operating results and financial position of Nippon Chemi-Con Group.
2. Risks concerning exchange rate fluctuations
Products of Nippon Chemi-Con Group are sold not only in Japan but also in Americas, Europe and Asia, and the proportion of consolidated net sales accounted for by overseas sales stood at 80.6% in the FY2021, and 80.8% in the FY2022. Although we forward exchange contracts to hedge the risk of exchange rate fluctuations, it is impossible to eliminate all such risk, and therefore such fluctuations may affect the operating results of Nippon Chemi-Con Group.
In preparing consolidated financial statements, those of our foreign affiliates are converted to JPY. Even if the values remain unchanged in local currencies, yen translations may fluctuate and thereby affect our business results.
3. Risks concerning price competition
Aluminum electrolytic capacitors, our main product, are subject to price competition between competitors in Japan and overseas, which carry the risk of impacting the operating results and financial position of the Group. As our Group conducts business activities in various countries and markets, we must respond to price competition risks based on specific factors of each country and market. Relevant risk factors include fluctuations in production and sales costs, rises in material costs, and innovations in production technology of each country and region. Our Group, which has a high ratio of overseas sales, constantly faces the threat of international competition. As such, intensifying price competition could not only drive down profits, but could also cause a drop in our global market share. One of our strengths is our integrated production system for everything from material development to product sales. We will take advantage of this structure to promote cost reductions by optimizing production systems. At the same time, we will increase our competitive strength by developing products with high added value and high profitability, and by expanding sales in core markets. We take measures against risks in line with the abovementioned business strategies, but intensifying price competition could impact the operating results and financial position of the Group.
4. Risks concerning raw material price fluctuations and procurement
Nippon Chemi-Con Group operating results and financial position may be impacted by cost increases attributable to increased procurement prices for raw materials such as aluminum foils and heavy oil or delays in product shipments caused by difficulty in procuring raw materials.
Nippon Chemi-Con Group implements various risk avoidance measures, including promoting continuous cost reductions by engaging in local procurement at overseas manufacturing companies and pursuing productivity improvements. Nippon Chemi-Con Group also purchases raw materials from multiple suppliers and engages in regular credit management of our suppliers. However, Nippon Chemi-Con Group operating results and financial position could be impacted in the event of an extreme increase in raw material prices or extensive raw material shortages caused by natural disasters or other conditions.
A new risk to our procurement is emerging due mainly to the US economic security measures including the enforcement of the Uyghur Forced Labor Prevention Act (UFLPA) and the sanctions against Russia. The number of our production suspension (EOL) cases has also been on the increase to reduce unprofitable operations. Under the circumstances, we have been working on our supply chain reinforcement that is urged for stable procurement.
5. Risks concerning product defects
Nippon Chemi-Con Group conducts manufacturing at each global production site in accordance with globally recognized quality management standards (UL standards, AEC-Q200, etc.).
However, there is no guarantee that we will not experience product defects in any of our products at some point in the future. Although we do have product liability insurance, there is no guarantee that this insurance will be sufficient to fully cover liability compensation amount.
Furthermore, we have obtained certification such as ISO9001 and IATF16949 at all manufacturing sites as part of efforts to strengthen quality management. However, Nippon Chemi-Con Group operating results and financial position could be impacted by the occurrence of a large-scale product defect.Additionally, the Group has built a system that can promptly deal with a defect, if occurs, to minimize the impact.
6. Risks concerning laws and public regulations
Significant changes in laws and public regulations in regions both at home and overseas, where Nippon Chemi-Con Group operates its business, may influence the business results and financial position of Nippon Chemi-Con Group. Besides expenses to comply with such regulations, criminal penalties and administrative actions including governmental charges or payment of compensation in case of violation against laws and public regulations, may also influence the business results and financial position of Nippon Chemi-Con Group.
Nippon Chemi-Con Group's business is subject to environmental regulations, and introduction of new regulations or the significant changes in the existing ones may pose the risk of environmental responsibility to Nippon Chemi-Con Group.
Nippon Chemi-Con Group is using legal means to respond to some decisions by the competition law authorities of various countries to assess fines against our Group in relation to aluminum electrolytic capacitor transactions. Separately from the above, civil lawsuits have been filed against Nippon Chemi-Con and our subsidiary in relation to this case in the United States and Canada, etc.
Among these, Nippon Chemi-Con and its subsidiary United Chemi-Con, Inc. (hereinafter the "Company, etc.") have concluded a compromise agreement with the direct and indirect purchaser plaintiffs in the class action civil lawsuit in the United States concerning the trade of our electrolytic capacitors and film capacitors. Aside from the above, the Company, etc. have civil lawsuits with the direct purchaser plaintiffs who have not taken part in the class action civil lawsuit. The Company, etc. have accepted no liabilities for such damages, etc. However, after giving comprehensive consideration of the circumstances, the Company, etc. agreed in July 2022 with some of these plaintiffs to pay 31.5 million US dollars for settlements. Furthermore, the jury in the session held in May 2023 at the California State North County Federal District Court delivered a verdict that authorizes damages of 89.2 million US dollars against the Company, etc. in the civil lawsuit where Avnet, Inc. is the direct purchaser plaintiff who has not taken part in the class action civil lawsuit in the United States. In June 2023, the same district court ordered the Company, etc. to pay 150.677 million US dollars, which is the statutory triple damages resulting from multiplication of the amount authorized by the aforementioned verdict from which the sums of the settlements to the other plaintiffs in the same civil lawsuit are deducted. The plaintiffs' attorney fees that the Company, etc. are obliged to bear will be decided later. The Company, etc. are studying the decisions made in this civil lawsuit, including whether or not to appeal to a higher court, and are determined to take appropriate steps in the future accordingly.
Meanwhile, the Company, etc. have faced class cation civil lawsuits demanding compensation for damages in the States of Ontario, Quebec and British Columbia of Canada concerning our electrolytic capacitors and film capacitors that are allegedly in violation of the Canadian Competition Act, etc. The Company, etc. have accepted no liabilities for such damage compensation. However, after giving comprehensive consideration of the circumstances, the Company, etc. concluded a compromise agreement in May 2023 with all the plaintiffs in the class action civil lawsuits in Canada (covering the direct purchaser plaintiffs, indirect purchaser plaintiffs and other types of plaintiffs except the plaintiffs who have not taken part in the class action civil lawsuits after being filed) to pay 21.3 million Canadian dollars for settlements. The agreement will take effect officially after the approval procedure by the court is completed.
If these legal proceedings result in what we deem to be an unfavorable verdict or in the event we are required to make payments as part of a settlement, it may impact the operating results and financial status of the Group.
7. Risks concerning natural disasters and unpredictable events
Nippon Chemi-Con Group operating results and financial position could be impacted by a stop in production caused by facility damage or difficulty in supplying electricity or water due to natural disasters such as earthquakes or some unpredictable events. The spread and prolongation of pandemic not only has the potential to cause economic downturn, but may also impact the continuation of business operations due to the suspension of operations requested by national governments. We prioritize the safety and health of our employees and stakeholders, and will continue to gather information and cooperate with administrative authorities. At the same time, we will implement various infection prevention measures to continue operations, including telecommuting and staggered working hours, as well as adopting tools for remote work.
8. Climate change related risks
Climate change related risks stemming from global warming could impact on the performances and financial position of the Nippon Chemi-Con Group. Presently major nations are studying on the introduction of carbon tax, carbon pricing, and an emission trading system. If these are introduced, it would have significant impact on our med-term performance, which stems from risks of additional direct and indirect expenses, including soaring costs of raw materials, to the Group. In addition, if the Nippon Chemi-Con Group fails to fully meet customer requirements related to climate changes (supplier screening standards, etc. concerning environmental performance and sustainability), the failure entails the risk of decreasing in sales due to the lowering competitiveness, etc. of our products in the market. Furthermore, intensifying and more frequent natural disasters entail the risk of suspending the Nippon Chemi-Con Group's business continuity and causing additional extraordinary expenses to the manufacturing activities, etc. in our entire supply chain. To manage such risks, Nippon Chemi-Con Group is working for CO2 reduction initiated by the Energy-Saving Sub-Committee based on the roadmap for Group-wide energy-saving ad carbon-neutral measures. Furthermore, the Nippon Chemi-Con Group has decided to take precedence in expanding disaster prevention equipment in its business bases, which will have significant impact on our business activities if such a natural disaster occurs, and to make endeavors that will satisfy customer requirements from the viewpoints of procurement and R&D.